Labor market stays hot
Second consecutive sharp gain puts Fed on track to hike.
In its last major report before the Federal Reserve’s critical policy-setting meeting March 16, the labor market showed in February it benefitted from the sharp decline in the Covid omicron variant to post a much stronger-than-expected gain of 678,000 nonfarm jobs. The total is well above the Bloomberg consensus for an increase of 423,000 jobs and our more optimistic forecast here at Federated Hermes for a gain of 451,000. Further to the strength of the report, the Labor Department revised December and January results higher by a combined 92,000 jobs.
The household survey added a solid 548,000 jobs, pushing the unemployment rate down to a post-pandemic cycle low of 3.8%, while the participation rate rose to a cycle high of 62.3%. Wage gains were surprisingly unchanged in February, but that likely was a mix-shift issue, as the unemployment rate for low-wage workers plunged from 6.3% in January to a cycle low of 4.3% in February.
One word of caution is that the survey week for this data came before the start of the disastrous Russian invasion of Ukraine late in the month, which has pushed crude oil prices up 30%, from $90 to $117 per barrel (a 14-year high) over the past week. Those developments could very well negatively impact next week’s March employment survey and the nonfarm payroll report to be released April 1.
Fed stays on track to raise rates Even though average hourly earnings were unchanged on a month-over-month basis in February, wages still rose by a strong 5.1% year-over-year (y/y). Importantly, nominal CPI inflation has soared 7.5% y/y in January, which means that the average wage earner has lost 2.4% in purchasing power over the past year. We expect this deleterious trend to worsen in coming months, as energy prices have gone vertical. Companies are passing higher labor, shipping and commodity costs onto their customers in the form of higher prices, creating a self-reinforcing upward inflationary spiral.
As a result, we expect the Fed to complete its bond-buying taper later this month and execute the first of six quarter-point rate hikes over the balance of 2022. Frankly, if it weren’t for the rampant uncertainty surrounding Ukraine, the Fed would be more likely to hike rates by a half-point. So if the conflict calms down in the coming months, but inflation continues to rage, we could see the Fed hike more aggressively later as it endeavors to get out from behind the inflation eight ball.
Unemployment rate falls; labor impairment and participation rates rise The household survey increased for the eighth consecutive month in February by 548,000 jobs, versus a stronger gain of 1.199 million in January, while the number of unemployed people fell by 243,000, versus an increase of 194,000 in January. As a result, the unemployment rate (U-3) fell to a new cycle low of 3.8% last month, down from 4% in January. We anticipate U-3 could approach its pre-pandemic low of 3.5% by year-end. The labor impairment rate (U-6) ticked up to 7.2%, the civilian labor force rose by 304,000, down from an outsized gain of 1.393 million in January, and the participation rate increased a tick to a cycle high of 62.3%.
ADP soars, claims decline and openings remain robust The ADP private payroll survey rose by a stronger-than-expected 475,000 jobs in February (consensus at 375,000 jobs), but January was revised sharply higher to a gain of 509,000 jobs from a preliminary loss of 301,000 jobs in January. We can’t remember a monthly revision as massive as 800,000 in the history of this survey. Initial weekly jobless claims fell to a two-month low of 215,000 last week, a 25% decline over the past six weeks. The lagging Job Openings & Labor Turnover Survey (JOLTS) rose to 10.9 million open jobs in December (just off October’s record high of 11.1 million openings). There are roughly 1.7 job openings for every unemployed worker, the most in two decades. Voluntary quits remain elevated at 4.3 million workers (just off November’s record 4.5 million), with a near-record quits rate of 2.9% (3% in November), as the “Great Resignation” continues. Employers laid off or fired just 1.2 million workers in December, the fewest on record, reflective of the drum-tight labor market.
K-shaped recovery accelerates The savings rate plunged to an eight-year low of 6.4% in January, down from an elevated, stimulus-induced 26.6% in March 2021. This reading places it back in line with its 25-year average of 6.7%. As a result, the unemployment rate for low-wage workers plunged to a 30-year low of 4.3% in February from 6.3% in January, as many have re-entered the labor force. Highly skilled workers saw their unemployment rate slip a tick 2.2%.
Sector details The manufacturing sector added a stronger-than-expected 36,000 jobs in February (consensus at 24,000), which erased January’s weak addition of only 16,000 jobs, getting back on track with gains of 41,000 in December, 48,000 in November and 53,000 in October. Construction hiring surged with the addition of 60,000 workers in February, compared with a tepid gain of only 7,000 in January, versus 44,000 in December and 47,000 in November. Christmas sales were robust (up 16.2% y/y), and retailers added 37,000 jobs in February, 69,000 in January and 38,000 in December. Transportation & warehousing added 48,000 in February, on top of 51,000 in January. Temporary hiring, a leading indicator of employment trends, added 36,000 in February, compared with 33,000 in January and 41,000 in December. Leisure & hospitality was the strongest category by far, adding 179,000 workers in February, versus gains of 167,000 in January, 186,000 in December and 191,000 in November. The surge in lower-wage workers in this category resulted in the mix shift to no gain in overall monthly wages.